Chapter 2

Question 1

What is Job-order Costing?

Answer 1

Tracing Cost backs to certain Jobs and is used for production of large, unique, high-cost items and built to order rather than mass produced

Question 2

What is POHR

Answer 2

A predetermined overhead rate = Budget manufacturing OH cost / Budgeted Amount of cost driver (activity base)

Question 3

How can we apply Overhead

Answer 3

POHR x Actual Activity

Question 4

Underapplied or Overapplied?

Answer 4

Actual Overhead > applied Overhead ⇒ underapplied
Actual Overhead < applied Overhead ⇒ overapplied

If Actual OH - Applied OH = “Negative” => Overapplied

Question 5

How do the entries look in Over or Underapplied

Answer 5

Overapplied
Dr. Manufacturing overhead
Cr. COGS

Underapplied
Dr. COGS
Cr. Manufacturing overhead

Question 6

Four criteria for a good solution to transfer-pricing problem?

Answer 6

1. Motivates managers to do what is best for the firm
2. Motivate units to save costs and to use resources efficiently
3. Help top managers to evaluate the performance of individual subunits
4. Preserve autonomy of subunits Decentralisation)

Question 7

What is the Net Income Effect

Answer 7

Transfer Prices have no effect on overall company profit: Company profit = Auto + Battery division

Question 8

Transfer Price Formulas

Answer 8

Transfer price = Variable (+ Opportunity cost per unit)

Depending if the Producing Division has excess capacity

Question 9

General Rules for Transfer Pricing

Answer 9

When the selling division is operating at capacity, the transfer price should be set at the market price (Or at some slight discount to the market price if synergies to transferring goods exist within the firm)

When the selling division is operating below capacity, the minimum transfer price is the variable cost per unit (including transfer costs)